Rate cut fails to improve sentiment

Consumer sentiment is flat, despite a 50 basis point cut from the Reserve Bank. The Westpac Melbourne Institute Index of Consumer Sentiment increased by 0.8 per cent in May from 94.5 in April. Westpac's Chief Economist, Bill Evans, said the results were surprisingly low and fell well below expectations. Its is a disappointing result. It follows a surprise 0.5 per cent cut in the official cash rate by the Reserve Bank and extensive media coverage that the unemployment rate had fallen from 5.2 per cent to 4.9 per cent.

However, other factors appear to have offset these positives. Firstly there might have been a degree of disappointment amongst households that the standard variable mortgage rate was reduced by an average of 0.37 per cent. The results show that sentiment is two per cent lower now, than when the cash rate was, 100 basis points higher last October at 4.75 per cent. The lower than expected sentiment could give the Reserve Bank reason to cut the cash rate again in the coming months. Westpac's current view that the Bank will wait until July before it cuts again but developments overseas along with today’s evidence that the recent cut has had little impact on Confidence could easily see the Bank bring that decision forward to the next Board meeting in June.